Orlando Harmon
Federally insured loans are loans that are insured by the federal government. They are sometimes referred to as government-backed loans. There are different types of federally insured loans, including Federal Housing Administration (FHA) loans, Federal Family Education Loans (FFELs), and loans from federally insured credit unions. FHA loans are home mortgages insured by the government and issued by approved lenders, designed to help low- to moderate-income families attain homeownership. FFELs are student loans issued by private lenders and guaranteed by the federal government. Federally insured credit unions offer their members deposit insurance coverage for their accounts, similar to the coverage provided by the Federal Deposit Insurance Corporation. This insurance protects the insured deposits of credit union members.
| Characteristics | Values |
|---|---|
| Type of loan | Federal Housing Administration (FHA) loan, Federal Family Education Loans (FFELs), VA loans, federally-insured credit union loans |
| Who is it for? | FHA loans: low- to moderate-income families, first-time homebuyers, borrowers with lower credit scores. FFELs: students. VA loans: active-duty military personnel, veteran service members, certain military spouses |
| Who provides it? | FHA loans: issued by a bank or other approved lender. FFELs: private lenders like Sallie Mae and commercial banks. VA loans: originated by a mortgage company. Federally-insured credit union loans: credit unions |
| Insurance provider | FHA loans: insured by the government. FFELs: guaranteed by the federal government. VA loans: backed by the Department of Veterans Affairs. Federally-insured credit union loans: insured by the National Credit Union Share Insurance Fund |
| Insurance cost | FHA loans: upfront mortgage insurance premium (UFMIP) of 1.75% of the base loan amount, plus a monthly mortgage insurance premium (MIP) ranging from 0.15% to 0.75% annually of the loan amount. VA loans: no monthly mortgage insurance premiums. Federally-insured credit union loans: up to $250,000 per account |
| Down payment | FHA loans: as low as 3.5% of the purchase price. VA loans: no required down payment |
| Interest rates | FHA loans: lower interest rates than conventional mortgages. VA loans: lower interest rates than conventional mortgages |
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What You'll Learn
Federally insured credit unions
The NCUA's Share Insurance Estimator lets consumers, credit unions, and their members know how its share insurance rules apply to their accounts. The estimator can be used for personal, business, or government accounts. All federally insured credit unions must display the official NCUA insurance sign at each teller station and on their websites.
Credit union members don’t need to apply for share insurance coverage as it’s provided automatically when they join a federally insured credit union. The insurance covers individual accounts at federally insured credit unions up to $250,000, and a member’s interest in all joint accounts combined is insured up to the same amount. The Share Insurance Fund also separately protects IRA and KEOGH retirement accounts up to $250,000.
It's important to note that there are state-chartered credit unions that are insured by private insurers, providing non-federal share insurance coverage. These are not backed by the full faith and credit of the United States, so members should confirm their credit union is federally insured.
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Federally guaranteed student loans
Before June 30, 2010, lenders issued federal student loans as either guaranteed student loans or direct loans. The type of loan a student received depended on the loan program their school had chosen. After this date, federal student loans could only be obtained under the direct student loan program.
Under the guaranteed student loan program, private lenders like Sallie Mae and commercial banks issued student loans that the federal government guaranteed. These guaranteed loans are also called Federal Family Education Loans (FFELs).
The "guarantee" works as follows: if a borrower defaults on a guaranteed loan, the federal government pays the bank approximately 97% of the principal balance and takes over the loan. At this point, the federal government owns the loan and has the right to collect payments on it. Types of FFELs include Stafford, PLUS (Parent Loan for Undergraduate Students), and Consolidation loans.
Although schools no longer offer guaranteed student loans, the guaranteed student loan system will persist for many years. This is because millions of borrowers still owe money on FFEL guaranteed loans. The guarantee agencies will continue to pay banks for defaulted FFELs and pursue loan collections until the last FFEL is paid off.
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Federal Housing Administration (FHA) loans
A Federal Housing Administration (FHA) loan is a government-insured home mortgage issued by a bank or other lender approved by the agency. FHA loans are intended for borrowers who might find it difficult to obtain loans otherwise. They require a lower minimum down payment than many conventional loans, and applicants may have lower credit scores than what is usually required. FHA loans are designed to help low- to moderate-income families attain homeownership, and they are particularly popular with first-time homebuyers.
Congress created the FHA in 1934 during the Great Depression. At that time, the housing industry was in trouble: default and foreclosure rates had skyrocketed, 50% down payments were common, and mortgage terms were impossible for ordinary wage earners to meet. As a result, only one in 10 households owned their homes. The government created the FHA to reduce the risk to lenders and make it easier for borrowers to qualify for home loans.
To obtain an FHA loan, borrowers are required to purchase mortgage insurance, with the premium payments going to the FHA. There are two types of mortgage insurance premiums (MIPs): an upfront MIP and an annual MIP, which is paid monthly. The upfront MIP is equal to 1.75% of the base loan amount. For example, if you're issued a home loan for $350,000, you'll pay an upfront MIP of $6,125 (1.75% x $350,000). You can pay the upfront MIP at the time of closing or roll the amount into the loan. These payments are deposited into an escrow account that the U.S. Treasury Department manages. If you end up defaulting on your loan, the funds will go toward the mortgage repayment. After the initial, one-time payment, borrowers make MIP payments every month, ranging from 0.15% to 0.75% annually of the loan amount.
The FHA mandates that the loan-to-value (LTV) ratio cannot exceed 96.5% of the value of a home with an FHA loan. In other words, you can have a down payment as low as 3.5% of the purchase price, meaning you can qualify for FHA financing of up to 95.5% of the property's value. However, if your credit score falls between 500 and 579, you will need to make a down payment of at least 10%, and you can only finance up to 90% of the property's value.
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Government-insured mortgages
A government-insured mortgage is a mortgage loan insured by the government. It is sometimes referred to as a government-backed mortgage, and the definition remains the same. The government does not issue the mortgage or lend money directly to borrowers. Instead, the loan is originated or funded by a mortgage company and then insured or guaranteed by the government. The purpose of government-insured mortgages is to ensure that certain borrowers who may not be able to obtain a conventional mortgage for various reasons have access to mortgage credit and are able to buy a home.
The most popular type of government-insured mortgage is the Federal Housing Administration (FHA) loan. FHA loans are mortgage-backed loans insured by the government, allowing borrowers who may not be able to qualify for a conventional home loan to buy a home. FHA loans require a lower minimum down payment than many conventional loans, and applicants may have lower credit scores than those required by the best mortgage lenders. FHA loans are designed to help low- to moderate-income families attain homeownership and are particularly popular with first-time homebuyers. FHA loans are available to everyone, including those who can afford conventional mortgages.
FHA loans require both an upfront payment for mortgage insurance and separate monthly mortgage insurance payments for the life of the loan, depending on the loan-to-value ratio. The upfront mortgage insurance premium (UFMIP) is equal to 1.75% of the base loan amount at closing, and the monthly mortgage insurance premium (MIP) varies based on the amortization term and loan-to-value ratio. FHA borrowers must pay two types of MIPs—one upfront and the other monthly. FHA mortgage insurance can be removed in two cases: first, if the initial loan-to-value ratio was less than or equal to 90%, and second, if the FHA loan is refinanced.
The second most popular type of government-backed loan is a VA loan, which is backed by the Department of Veterans Affairs. VA loans are only available to active-duty military personnel, veteran service members, and certain military spouses. For borrowers who qualify, VA loans carry significant benefits, including lower interest rates, no required down payment, and no monthly mortgage insurance premiums.
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VA loans
A federally insured loan is a loan that is insured by the federal government. One example of a federally insured loan is a Federal Housing Administration (FHA) loan. FHA loans are home mortgages insured by the government and issued by approved lenders. They are designed to help low- to moderate-income families attain homeownership.
Another type of federally insured loan is a VA loan. VA loans are provided by private lenders, such as banks and mortgage companies, and are guaranteed by the Department of Veterans Affairs (VA). These loans are available to veterans, service members, and eligible surviving spouses to help them become homeowners.
To be eligible for a VA loan, applicants must have satisfactory credit, sufficient income to meet the expected monthly obligations, and a valid Certificate of Eligibility (COE). VA loans can be used to buy, build, improve, or adapt a home for personal occupancy.
In addition to purchase loans, VA loans also offer cash-out refinance options, interest rate reduction refinance loans (IRRRL), and the Native American Direct Loan (NADL) program, which helps Native American veterans finance homes on Federal Trust Land.
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Frequently asked questions
Federally insured loans are mortgages backed by the government. The government does not directly lend the money or issue the mortgage, but it insures the loan, reducing the risk to lenders and making it easier for borrowers to qualify.
A Federal Housing Administration (FHA) loan is a type of federally insured loan. It is a mortgage that is insured by the government and issued by a bank or other approved lender. FHA loans are designed to help low- to moderate-income families attain homeownership.
FHA loans require a lower minimum down payment than many conventional loans, and applicants may have lower credit scores than is usually required. Due to FHA insurance, banks are more willing to lend to homebuyers with low credit scores and small down payments.
To obtain an FHA loan, you must purchase mortgage insurance, with the premium payments going to the FHA. There are two types of mortgage insurance premiums (MIPs)—an upfront MIP and an annual MIP, which is paid monthly. The upfront MIP is equal to 1.75% of the base loan amount.
